Banking Law

FinCri Advisor disputes at least a portion of the FDIC's rationale for its recently adopted restrictions on newly chartered state nonmember banks.

The FDIC says its recent decision to expand the de novo supervisory period from three to seven years was based on data that showed banks insured less than seven years are "over represented" on the list of 109 bank failures since 2008. But a FinCri Advisor analysis of the failed bank data shows that the spike in new bank failures primarily is based in Georgia.

On the other hand, other statistics cited in the same article seem to support the FDIC's concern.

From 2000 to 2007, new banks made up just 10% of the banks that failed across the country. From 2008 through the end of August, new banks comprised 21% of all the bank failures.

A parenthetical passage contains a little nugget of gold for those interested in whether or not the FDIC has imposed an "unacknowledged moratorium" on new thrift charters.

(Charles "Stormy" Greef, a law partner at Hunton & Williams in Dallas, says the FDIC told him last week that while there was no moratorium on new bank charters, all de novo charters "were going to Washington" and that it could take more than a year to process applications.)

A year is a long time to hold together your management team and investors. A year or more in the hopper, with no guarantee the answer won't be "no" makes a new charter a high risk course, at least in my humble view. I'd be interested to know how many new bank charter applications have been filed since the meltdown of last fall, and how many of applications for insurance of accounts associated with the new charter applications have been approved by the FDIC. That would be telling.

"Stormy" Greef also points out another risk posed to new charters: complying with the new FDIC policy going forward, even if FDIC approval is eventually secured.

Up until now, the FDIC had required de novo institutions to provide written notice of proposed changes in their business plans during the first three years of operation. Under the new policy, those banks will need prior approval for any material business plan changes. That approval will be based on an FDIC analysis of the bank's capital, management expertise and internal controls. Banks that do not get FDIC's prior approval will be subject to civil money penalties and enforcement actions.

"It's a pretty broad-based item to say we're going to apply this to all new banks," Greef says. Only one Texas de novo bank has failed since 2008. Greef says he has heard that if a bank's projected asset category deviates more than 10% from what it projected, examiners will view that as a "material change" in the business plan.  "That's awfully hard," he notes. 

Agreed.

Finally, Greef speculates that the FDIC's position will spread like the Swine Flu throughout the federal bank regulatory biosphere.

"I would assume that the FDIC is encouraging the Fed, OCC and OTS to adopt similar policies to more closely supervise de novo banks," he says. "If they don't, is everyone going to start opening national banks?" To stop that, he says the FDIC could put restrictions in its insurance approvals for new banks.

That's what I expect will happen.

There is no love lost for de novo banks these days in D.C., is there? The FDIC officially denies that there's a moratorium, although FDIC insiders might admit that there is an unofficial moratorium that applies primarily to certain types of business plans or in certain geographic areas. The problem is, even if you appear to be as squeaky clean as Mother Teresa, as knowledgeable as Jamie Dimon, and as conservative as Newt Gingrich, you could spend a year or more working your way through the system before you find out that...oops...there's been a change in an "unannounced" policy and "we're so sorry, but you must go now and sleep with the fishes."

Each organizing group has to make a basic judgment call on which way to go: form a de novo bank or find an existing bank to purchase. The FDIC seems to me to be indicating a preference that folks with money find a bank (preferably, one that could benefit from new capital, management, business plan, etc.) and buy it, rather than start one from scratch. Of course, as Dennis Miller says, that's just my (non-legal) opinion. I could be wrong. The nice thing about a free economy is that you can obtain as many opinions as you can afford. The law of averages says that at least fifty percent of them will be correct. If the opinion giver is wrong, but you pay him or her by the hour on a monthly basis, whether or not the deal is approved (as is usually the case), the recipient, not the giver, of the opinion takes all the risk that the coin flip comes up heads, just like he or she called it. So, if you want to "go de novo," you have ask yourself the same question Dirty Harry used to ask all the punks he drilled with his .44 Magnum Smith & Wesson: "Do you feel lucky today?"

Well do you?